Will 2017 Bring Better Days for Chipotle Mexican Grill?

By Markets Fool.com

TheIndustry Focus: Consumer Goodscast wraps up its coverage ofChipotle Mexican Grill (NYSE: CMG)with a discussion of the recently tabled ShopHouse Southeast Asian Kitchen prototype restaurants.The company needs to experiment with new sources of revenue to regain its growth momentum, but a look to the future is more encouraging for this company than you may think.

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A full transcript follows the video.

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This podcast was recorded on Nov. 1, 2016.

Vincent Shen:In terms of the most recentearnings that came out last week,with the stock trading downdouble digits since then,some of you were probably very disappointed in thecontinued double-digit declines foroverall revenue, comparable sales, foottraffic, operating margins are at half the prior-year levels. Asit, you had touched on those. I think the95% decline in incomewas probably particularly painful fora lot of shareholders. But there's a lot of potential here as well in what Chipotle is adopting, what they'repursuing. You mentionedsome of the rising costs with labor, food,food disposal, and waste. But I think they announced about $100million in cost-cutting measures. Also, something else that had investors concerned was they'reending their ShopHouse Kitchen concept.I think there's 15 locations in three markets. Theyfailed to gain traction. A bigproponent of growththat investors believed Chipotle offered was the fact that they could take thesuccess of the flagship chain and apply it tonew concepts. Still, the company still has their pizza and their new burger concepts to pursue. I think, for 2017in general, the company has a much morepositive outlook in terms of comparable sales, the restaurant-level operating marginsshould recover quite well,and they'll just have better comparisons overallas the company laps some of its lows from early 2016.

One more thing touching on the data -- one more quote from Mr. Crumpacker. He said, "Forexample, using the data, we now know thatduring the last six months, we saw nearly 30 millionnew customers at Chipotle. These new customers arecustomers we have not seen since the food safety events of last year. In fact, transactionsfrom these customers account for nearly halfof all transactions over the last six months. Additionally,we know how many of these customers returned to Chipotle foradditional visits, and how many of them became regular customers."I think that kind of information -- and, that 30 millionnumber is very encouraging. Overall, despite some of the negativereception from the earnings,Chipotle is in an improving position, absolutely, following their troubles in this year.

Asit Sharma:Yeah,I am of the same mind. Really briefly, you know how you look at a stock chart that's spread out five years, and you kick yourself for selling a stock when it was down, or maybe you bought it when it was low priced and nowit has gone up a lot and you've sold it, the same phenomenon is occurring here with Chipotle. It's very hard to see, with the trees right in front of us,how many good things are going on in terms ofbetter operations, in terms of the datathat we've been talking about in this episode that they are definitely mining, the new customers. Butall these factorswill combine over the longer term, and they will come out of this withstronger revenue. And I believe that margins will recover.

I want to make one lastpoint, too, about the ShopHouse concept. I was sort of disappointed, too. Butlook at it from management's perspective. I remember management said, a couple years ago in a conference call, that for them, when a fieldmanager walks into a ShopHouse kitchen,he or she does not see the ShopHouse. He or she sees a Chipotle. So,it's a matter of finding the right concept and then expanding that one. Investors don't wantChipotle to throwgood money after bad. If they find a concept isn't getting traction, as you said, shelve it. There are a number of other concepts in the fast-casual space thatthey can put their operational model to.

Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.